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Commercial Banks’ Investment In Loans And Treasury Bills And Their Overall Profitability In Uganda
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1.6 Scope of the study
1.6.1 Subject scope
The researcher studied the overall profitability of commercial banks in Uganda in terms of ROE and ROA. The study covered commercial banks volume of investment in loans and associated lending rates and volume of investment in TBs and associated yields as variables that affect the overall profitability of commercial banks. All commercial banks licensed in Uganda as at 31st December 2004 were studied.
1.6.2 Geographical scope
The Geographical area of the study covered Kampala city only, since all commercial banks have their head offices in Kampala. The study covered a period of eight years, from 1998 to 2005.
1.6.3 Time scope
The time scope of the study was spread over eight years starting from 1998 to 2005. The data was collected from all commercial banks that were licensed in Uganda as at 31st December 2004.
1.7 Significance of the study
The findings were helpful in identifying some of the determinants of banks profitability in Uganda and therefore provide vital information to bank managers, for the development of effective strategies for enhanced performance. Profitability of banks impacts on financial sector soundness and stability. The study therefore has important policy implications that may help banking sector regulatory authorities in Uganda to come up with future policies and regulations for improving and sustaining the banking industry soundness and stability.
The outcomes of the study may also serve as useful pointers to macroeconomic issues for further investigation by Uganda’s economic authorities.
Thirdly, though similar studies have been conducted elsewhere (such as Athanasoglou et al., 2005), the United States of America (Berger et al., 1987; Berger, 1995b and Angbazo, 1997), Tunisia (Naceur and Goaied, 2001 and Naceur, 2003) and Colombia (Barajas et al., 1999), there is no econometric study to our knowledge that has exclusively examined determinants of bank profitability within the Ugandan context; therefore the present study fills an important gap in the existing literature and improve the understanding of bank profitability in Uganda.
1.8 Conceptual framework
Relationships between Uganda’s Commercial banks’ investment portfolio in loans and TBs and the overall profitability of the banks in terms of ROE and ROA
There is a relationship between the volume and associated return of commercial banks’ assets and the overall profitability of the banks as measured in terms of ROE and ROA. Commercial banks may invest in either loans or TBs as alternate investment options. Loans and TBs as alternate commercial bank assets have different risk and return profiles. Therefore, Commercial banks ‘ volume of loans and associated lending rates and volume of TBs and the associated yields should have a relationship with the overall profitability of the commercial banks in terms ROA and ROE. This hypothesis draws insights from portfolio theories (modern and classical), which analyze the risk-reward characteristics of investment portfolios. The conceptual framework below builds upon this literature to develop a model to evaluate the effect of commercial banks asset allocations in volume of loans and associated lending rates, and volume of TBs and associated yields, on commercial banks’ overall profitability in terms of ROA and ROE. For simplicity, the model focuses on only establishing relationships among the above named variables.
Conceptual Framework
Commercial banks’ investment in loans and TBs and their overall profitability in Uganda
Source: Variables developed from literature review are based on the works of De Young & Karin (1999); Wang J.C. (2003); De Young & Rice (2003); Allen & Santomero (1996), Smith et al (2003), Van Horne (1980) and others.
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ABSRACT - [ Total Page(s): 1 ]ABSTRACT Investigating the determinants of profitability of commercial banks has been one of the more popular topics among researchers in banking studies. Hence, to contribute to the existing knowledge, this study sought to analyze the extent to which investment in loans and treasury bills influence the overall profitability of commercial banks in Uganda, using a data set comprising 95 observations for 15 commercial ba ... Continue reading---
